Ok, I have to confess that I love inventories. That is, “good” inventories that are deployed for good reasons such as to mitigate against uncertainties, or are based on sound economic principles. Of course, I don’t like “bad” inventories that don’t serve a purpose and inevitably wind up being drastically marked down in price or disposed of.
Many supply chain managers would think me wrong. They and financial managers don’t often appreciate inventory. Generally, the latter managers especially don’t like inventory assets, since they don’t understand the benefit of using valuable financial capital to acquire and just hold them. Lean advocates are charged with cutting waste to the bone and in their zeal for getting leaner often eliminate good inventory with the bad. They risk a problem in customer service because their supply chains might then be too lean or emaciated (in a sense).
While working at AMR Research, I wrote an article where I used the analogy that inventory is like cholesterol. Both have two components to them: good and bad. So like cholesterol, you want to keep your total inventories as low as possible, but you don’t want the good component to get too low. How did I become such an inventory advocate?
Over 30 years ago I started my career at Arthur D. Little (ADL), a consulting and research firm that at that time was at the forefront of inventory management consulting. Robert (Bob) Brown had worked there. He is the father of the exponential smoothing forecasting methods used to feed scientific inventory management processes, such as statistically setting safety stocks. Many of the forecasting and inventory methods Bob espoused were developed during his tenure there, and today many systems still enable them. Additionally, ADL’s President, John F. Magee, wrote one of the first (if not the first) industry books on the topic, titled Production Planning and Inventory Control. He introduced basestock inventory management principles. These words are ingrained in my mind from the 2nd edition of the book: “Basically, inventories serve to decouple successive operations in the process of making a product and getting it to consumers.” And further, “…inventories free one stage in the production-distribution process from the next, permitting each to operate more economically.” (Of course, the latter holds only to the point where decoupling no longer yields benefit). Thus, I learned that inventory decouples (often uncertain) operations to ensure a smooth flow of product throughout a supply chain—however, to a point.